SVKM’s NMIMS SOHM (NAVI MUMBAI CAMPUS)

Principles of Operations Management

Students Handout / Notes

Session 1 – 21/07/23

Introduction to Operations Management

1. Operations Management (OM) Overview:

• OM is a critical field that focuses on efficiently managing the processes that
convert inputs into valuable outputs (goods or services).
• The main goal of OM is to create products/services that satisfy customer needs
while optimizing resource utilization.
2. Key Functions of Operations Management:
• Planning: Developing strategies and setting objectives for the organization's
operations.
• Organizing: Structuring resources and activities to achieve operational goals.
• Coordinating: Ensuring smooth communication and collaboration between
different parts of the organization.
• Controlling: Monitoring performance and taking corrective actions to ensure
operations are on track.
3. Importance of Operations Management:
• OM plays a central role in achieving an organization's overall objectives and
competitive advantage.
• It contributes to cost reduction, improved product quality, faster delivery, and
increased customer satisfaction.
4. Operations and the Supply Chain:
• Operations are part of a broader supply chain that encompasses the entire
process from raw materials to final products delivered to customers.
• OM involves managing the production process and its interaction with
suppliers and customers.
5. OM's Impact on Society:
• OM affects various aspects of society, including job creation, economic growth,
and the production of essential goods and services.
• Efficient operations contribute to a nation's economic development and
standard of living.
6. Challenges and Trends in Operations Management:
• Globalization: Businesses must deal with international markets and supply
chains, requiring effective coordination and adaptability.
• Sustainability: Increasing focus on environmentally friendly and socially
responsible practices.
• Technological Advancements: Embracing automation, artificial intelligence,
and advanced analytics to enhance operations.
7. Career Opportunities in Operations Management:
• OM professionals have diverse career paths, including roles in production
planning, inventory management, supply chain coordination, and process
 improvement.
• Their expertise is in high demand across various industries, from
manufacturing to healthcare and service sectors.

Comparison of manufacturing and services

Simultaneous production and consumption. High contact services (e.g. haircuts) must be
produced in the presence of the customer, since they are consumed as produced. As a result,
services cannot be produced in one location and transported to another, like goods. Service
operations are therefore highly dispersed geographically close to the customers.
Furthermore, simultaneous production and consumption allows the possibility of self-service
involving the customer at the point of consumption (e.g. gas stations). Only low-contact
services produced in the "backroom" (e.g., check clearing) can be provided away from the
customer.

Perishable. Since services are perishable, they cannot be stored for later use. In
manufacturing companies, inventory can be used to buffer supply and demand. Since
buffering is not possible in services, highly variable demand must be met by operations or
demand modified to meet supply.

Ownership. In manufacturing, ownership is transferred to the customer. Ownership is not

transferred for service. As a result, services cannot be owned or resold.

Tangibility. A service is intangible making it difficult for a customer to evaluate the service in
advance. In the case of a good, customers can see it and evaluate it. Assurance of quality
service is often done by licensing, government regulation, and branding to assure customers
they will receive a quality service.

These four comparisons indicate how management of service operations are quite different
from manufacturing regarding such issues as capacity requirements (highly variable), quality
assurance (hard to quantify), location of facilities (dispersed), and interaction with the
customer during delivery of the service (product and process design).
Additional Reading : India's services sector
It is an unending saga of gross negligence despite the services sector being the main driver of
India's growth story; contributes the most to GDP and is arguably the largest employer too
How neglected is India's services sector can be easily determined by asking a simple question
to policymakers, planners, or economists: What was the services sector's contribution to the
GDP in 1950-51?

It is highly unlikely that anyone would even guess it right: 36%. Its contribution then was next
to agriculture but it surpassed agriculture in mid-1960s, crossed 50% in mid-1960s, zoomed
past 60% in FY05, and continues its lofty perch since then. It has also been the main engine of
India's growth for several decades and, going by the International Labour Organisation (ILO)
projections, it became the largest employer in 2019 (closest to India's FY20), surpassing
agriculture.

The invisible sector that contributes the most to GDP

The following graph maps the GDP share of services and manufacturing since 1950-51 using
the 2004-05 and 2011-12 GDP series at constant prices.
Why this comparison with manufacturing?

That's because traditionally economic growth is associated with manufacturing, not services.
The developed nations of the west (like the UK, US, Germany, and others) and the success
stories of the east (Japan, South Korea, China, and others) have had a manufacturing-led high
growth story.

The remarkable element of the above graph is the huge gap in the contribution of services
and manufacturing to the GDP. In the 2004-05 GDP series (constant prices) the services' share
was four times more in 1950-51 and increased to 4.3 times in 2013-14. After the new series
(2011-12) was introduced and some sub-components of 'Trade, Hotels, Transport and
Communication (THTC)' were shifted from services to manufacturing, raising the latter's
share, the services' share of the GDP was still 3.6 times more than manufacturing's in 2019-
20.

Services is the largest employer too

In 2019 (closest to India's FY20), services surpassed agriculture for the first time as the largest
employer, according to the ILO's projections, which even the RBI and Economic Surveys use
in their reports because no government agency provided such estimates after the Planning
Commission was dismantled in 2014.

According to the ILO database, services provided employment to 44.2% of the total
employment in 2019 as against agriculture's 43.2%. In contrast, manufacturing's share was
just 11.4%.

The earlier years' sectoral shares of employment have been taken from the Planning
Commission and Economic and Political Weekly's December 1966 issue.
A World Bank's working paper released in 2014, "Can Service Be a Growth Escalator in Low
Income Countries?", tried to explain this while endorsing its role as the main growth engine.
It said: "It has been argued for more than 200 years that economic growth is associated with
the manufacturing sector. Services have been considered non-tradable, menial, low
productivity, and low-innovation."

It sought to impress that the conventional path of manufacturing-led growth and

development seems to have hit a roadblock in many parts of the world, especially in low-
income countries in Africa and South Asia. Some of these countries, like the Lions of Africa
(Tanzania and Ethiopia) and India have witnessed growth driven by services, unlike the East
Asian Tigers or the western developed economies.

The working paper does not argue that services is superior to manufacturing in driving
growth, or the other way round, but that the latecomers to development now have more
levers to pull because of globalisation and the Third Industrial Revolution that brought
information technology (IT) and information communications technology (ITC).

It argued that the Third Revolution led by services can upset five long-held tenets of economic
development: (i) traditional thinking that the services sector is a product of growth and can't
drive growth on its own is no longer valid; services can be produced and traded just like
manufacturing goods and is contributing more than manufacturing to growth and jobs in both
low and high-income countries (ii) global trade in services has exploded and is growing faster
than trade in goods (iii) technology, trade, and supply chains have changed services from
being lower in productivity than manufacturing; innovation in communication and transport
have contributed to global supply chain in services just like in manufacturing (iv) it is no longer
true, in both low and high-income countries, that goods jobs are created only in
manufacturing and (v) services-led growth is also compatible with greener, inclusive and more
gender-friendly growth.

How India treats its services sector

India belatedly recognised the services' sector's contributions and is yet to devote time or
energy to develop it.
The earliest recognition perhaps came with the working paper published by the Asian
Development Bank (ADB) in 2013, which is well reflected in its title, "The Service Sector in
India".

It said: "The service sector is the largest and fastest growing sector in India and has the highest
labour productivity, but employment has not kept pace with the share of the sector in gross
domestic product and has not produced the number or quality of jobs needed. There is no
policy leading to inclusive growth, and multiple, uncoordinated governing bodies adversely
affect the growth of the sector...

"Most of the poor in India do not have access to basic services such as healthcare and
education and infrastructure is weak so the cost of service delivery is high. Although India
wants to be a knowledge hub, there is no uniformity in the quality and standards of education
and formal education does not guarantee employability. Policy measures are suggested for
inclusive growth that will also enhance India's global competitiveness in services."

The Economic Survey of 2019-20 devoted an entire chapter to services and said, among
others: (a) the services sector's significance in the Indian economy has continued to increase
with it contributing around 55% of the total size of the economy and GVA growth (b) its share
exceeds 50% of Gross State Value Added in 15 out of 33 states and UTs and more than 80%
in Delhi and Chandigarh (c) it accounts for two-thirds of total FDI inflows and 38% of total
export and (d) services' exports have outperformed goods export in recent years, raising
India's share in world's commercial services exports to 3.5% in 2018, twice that of
merchandise export at 1.7%.

It also recorded that high-frequency data and other economic statistics suggested "a
moderation in services sector activity during 2019-20" with bank credit to the sector, air
passenger traffic, and rail freight traffic witnessing "a deceleration".

In August 2020, Geetanjali Nataraj, director of a central government body, Services Export
Promotion Council (SEPC), wrote in a national daily with an apt sub-head "An Unserviced
Sector".

In it, she wrote how the AatmaNirbhar Bharat packages had overlooked the plight of the
services sector even though it was the main driver of India's growth and was "struggling hard
to keep its head above water".
She issued a warning: "From tourism, aviation, shipping, space to call centres and delivery
services, the standstill in activities is bound to have a knock-out effect on employment,
production, and the economy as a whole. The big picture suggests that the current relief
provisions for the primary and secondary sectors would also be nullified as a consequence of
neglecting the tertiary sector (services)."

She also pointed out that due to this neglect, the services sector contracted for the fifth
successive month in July 2020.

How services would perform in FY21

Now that the 'First Advance Estimates of National Income 2020-21' is out, released on January
7, 2021, here is what Nataraj anticipated.

The National Statistical Office (NSO) estimates the overall GVA to shrink to minus 7.2% in FY21
(GDP to shrink to minus 7.7%).

About sectoral performances, it provides a mix picture. The agriculture-GVA and utilities-GVA
(component of industry) would register positive growth (3% and 2.7%, respectively). The
manufacturing-GVA (main component of industry) will shrink by minus 12.4%.

When it comes to services, all its four components will shrink.

The GVA of 'Financial, Real Estate, and Professional Services' will shrink to minus 0.8%, 'Public
Administration, Defence and Other Services' to minus 3.7%, 'Construction' to minus 12.6%
and 'Trade, Hotels, Transport, Communication, and Broadcasting' to minus 21.4% (all at
constant prices).